Monday, September 12, 2016

SpaceX and The Business of Insuring Stuff That Blows Up

From Quartz:

How to insure something that blows up once every twenty times you use it
Sophisticated satellites cost hundreds of millions of dollars and are assembled in clean rooms by technicians in full bodysuits. And then, to fly them into space, we strap them onto enormous rockets that explode spectacularly once in every 20 takeoff attempts.

Who’s on the hook when things go wrong? Welcome to the volatile world of space insurance.
When a SpaceX Falcon 9 rocket burst into flames Sept. 1 during a pre-flight mishap, the satellite sitting on top was the more valuable casualty. AMOS-6, owned by the Israeli company Spacecom and manufactured at a cost of $175 million, lay at the center of a delicate web of global contracts between its operator, the operator’s potential acquirer, its transporter, its manufacturer, and their various clients, including Facebook and NASA.

The answer to who would pay for the loss came a few days later, when the company that built AMOS-6, state-owned Israel Aerospace Industries (IAI), said it believed the loss was covered under the “All Risks Pre Launch policy” for events “during transit and whilst at the launch site” it had purchased from, naturally, Lloyd’s of London.

The fact that it took days is a testament to the technicalities involved in such complicated insurance and the secrecy of the rocket business. But it’s also a sign that the market for such an unstable financial instrument might not be ready for a coming increase in commercial satellite launches. (Governments, which still launch the most satellites, by and large do not bother insuring them.)
But perhaps satellite insurance is exactly what return-hungry insurers need, in an economic environment where high risk and the yields that accompany it are hard to find.

Got risk?
Rocketry has plenty of risk. The job is simply moving a couple of tons a few hundred miles, but going straight up requires using forces so strong that they are typically used only by the military, and only when mass destruction is on the table. Last week’s Falcon 9 fire provides a good illustration: As you watch all this propellant ignite, keep in mind that the machine being destroyed is designed to control and channel that force during normal operation.

Usually, an insurance business is built on high volume, low value, and predictability. Life insurance, for example, relies on large numbers of people paying small sums over time and dying within a fairly standard age range.

“Space is the exact opposite. You have twenty commercially-insured launches a year, that’s it. Worldwide, it’s basically a catastrophe business,” Mark Quinn, now CEO of global insurance broker Willis’ space division, told Quartz last year. “You’re looking at one loss that can give you a hit of $400 million, and annual market premium is $750 million. One loss that burns more than 50% of the annual income for the entire market.”

Indeed, in 2013, the market hit the red after $775 million in premiums were outstripped by more than $800 million in claims, according to industry data. That year, among other failures, a Russian Proton rocket carrying three navigation satellites exploded when its guidance sensors were installed upside down, and a youthful rocket company called Sea Launch put an Intelsat communications satellite right into the Pacific....MORE